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The Ultimate Contrarian Play?

By Brian Stoffel – Updated Apr 7, 2017 at 5:04PM

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Hedge fund manager sees a bottom in one industry and a peak for one beloved company.

Want to know how to make a fortune in investing? It's actually pretty easy: Buy low and sell high.

If only it were that simple in real life. Buying low means making a decision to invest with a company or industry that's highly out of favor and no one else will go near. Selling high means backing out of the party just as everyone is heaping praise on your company. The psychological barriers to actually pulling this off in real life are immense.

Maybe that helps explain why so many scoffed at the call hedge fund manager Jeff Gundlach made last week: "If I were one of the nutty hedge fund guys, I would go short Apple, long natural gas, and leverage it 100x."

Not that Gundlach is actually considering doing that, but I thought it would be worthy to investigate whether such a call had any merit. Below, I'll let you know what I think, and I'll be setting up a CAPS profile to track my performance on this call. At the end, I'll also offer you access to a special free report on the only energy stock you'll ever need.

Short Apple?
Let's get one thing out of the way before diving in any further. I simply don't think shorting Apple would be a good idea. The company is showing no signs of slowing down on its incredible growth over the last decade. iPhone sales continue to be out of this world, and the company is sitting on a mountain of cash.

Sure, it's entirely possible that the company's days of leading the tech sector in innovation are over. But without any specific information to back that assertion up, you'd simply be gambling with your money -- not investing it -- by shorting Apple.

But he may have a point with natural gas
When it comes to natural gas, however, I think Gundlach may well have a point. Yes, prices for natural gas are at historical lows right now, but if you take a systematic approach to thinking about the situation, you'll see that this isn't necessarily a long-term problem.

This is overly simplistic, but it illustrates an important reality. Surely, cheap natural gas has been a drag on the companies that extract it. Natural gas leader Chesapeake Energy (NYSE: CHK) announced it was cutting back on production earlier this year. And SandRidge Energy (NYSE: SD) has increased its focus on oil while cutting back on natural gas production.

But low prices have been a boon for companies that can profit from the situation. Westport Innovations (Nasdaq: WPRT), a company that designs natural gas engines, is up 70% in the last two years -- and cheap natural gas has a lot to do with it. Clean Energy Fuels (Nasdaq: CLNE), which aims to build out "America's Natural Gas Highway," is likewise up an impressive 44% since the year began.

While Westport and Clean Energy are busy helping to build out the infrastructure and gain customers for natural gas vehicles, demand should pick up. Depending on the success of their efforts -- and on the spread between oil prices and natural gas prices -- more and more people will need access to natural gas. This, of course, leads to higher prices for the commodity.

There's a lot that could happen over the next 10 years, but I'm willing to wager that a bet on natural gas companies right now would be a perfect play if your time horizon is that long. Not only do we seem to be at the sweet spot in the above cycle -- which means natural gas stock prices are likely at their lowest -- but natural gas will soon be exported to countries where it's far more expensive. This will also help drive demand.

Some actionable advice
As I stated above, I'll be starting a CAPS profile to test my hypothesis that now would be a good time to invest in natural gas companies. I've chosen fifteen to put in the portfolio; most of them are natural gas extractors, but there are some peripheral plays as well. For instance, Heckmann (NYSE: HEK) which is the first-mover among companies vying to be responsible for the disposal of waste water caused by the fracking process, also has its future tied tightly to the price of natural gas. Simply click here to see the portfolio.

But, if following all of these companies seems like too dizzying a task, be not afraid. The Motley Fool's top analysts have already selected the only energy stock you'll ever need. Inside a special free report, you'll find out which company this is, and why it will succeed no matter what the energy of our future is. Get your copy of the report today, absolutely free.

Fool contributor Brian Stoffel owns shares of Apple and Westport Innovations. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool owns shares of Westport Innovations, Apple, and Heckmann. Motley Fool newsletter services have recommended buying shares of Apple, Westport Innovations, Chesapeake Energy, and Clean Energy Fuels, and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Stocks Mentioned

Nuverra Environmental Solutions, Inc. Stock Quote
Nuverra Environmental Solutions, Inc.
NESC
Clean Energy Fuels Corp. Stock Quote
Clean Energy Fuels Corp.
CLNE
$5.38 (6.54%) $0.33
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Westport Fuel Systems Inc. Stock Quote
Westport Fuel Systems Inc.
WPRT
$0.92 (0.52%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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